M/s. SAKARWADI TRADING CO. LTD., MUMBAI v. DCIT CIR - 2(3), MUMBAI

ITA 2591/MUM/2006 | 2000-2001
Pronouncement Date: 31-03-2011 | Result: Dismissed

Appeal Details

RSA Number 259119914 RSA 2006
Assessee PAN AAACS6687A
Bench Mumbai
Appeal Number ITA 2591/MUM/2006
Duration Of Justice 4 year(s) 11 month(s) 4 day(s)
Appellant M/s. SAKARWADI TRADING CO. LTD., MUMBAI
Respondent DCIT CIR - 2(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 31-03-2011
Appeal Filed By Assessee
Order Result Dismissed
Bench Allotted B
Tribunal Order Date 31-03-2011
Date Of Final Hearing 16-02-2011
Next Hearing Date 16-02-2011
Assessment Year 2000-2001
Appeal Filed On 26-04-2006
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL 'B' BENCH MUMBAI BEFORE SHRI D. MANMOHAN VICE PRESIDENT AND SHRI B. RAMAKOTAIAH ACCOUNTANT MEMBER ITA NO. 1901/MUM/2004 & ITA NO. 2591/MUM/2006 (ASSESSMENT YEAR: 2000-01) M/S. SAKARWADI TRADING CO. P. LTD. ACIT CIRCLE 2(3 ) ROOM NO. 20 YUSUF BLDG. AAYAKAR BHAVAN M.K. ROAD 43-45 M.G. ROAD FORT VS. MUMBAI 400020 MUMBAI 400023 PAN - AAACS 6687 A APPELLANT RESPONDENT APPELLANT BY: NONE RESPONDENT BY: MS. REENA JHA TRIPATHI O R D E R PER B. RAMAKOTAIAH A.M. THESE APPEALS BY THE ASSESSEE ARE AGAINST THE ORDER OF THE CIT(A) XXXII MUMBAI WITH REFERENCE TO QUANTUM AND PENALTY UNDER SECTION 271(1)(C) RESPECTIVELY DATED 08.12.2003 AND 09.01.2006. THESE APPEALS WERE POSTED NUMBER OF TIMES AND THE HEARING WAS ADJOURNED AT TH E REQUEST OF THE ASSESSEE ALMOST AT 8 TIMES APART FROM ADJOURNMENTS DUE TO ADMINISTRATIVE REASONS. WHEN THE CASE WAS POSTED LAST TIME ASSESSE E SOUGHT ADJOURNMENT IN WRITING AND WAS POSTED ON 08.03.2011. AGAIN ASSE SSEE SOUGHT ADJOURNMENT ON THAT DAY WHICH WAS REFUSED IN VIEW O F THE NUMBER OF ADJOURNMENTS ALREADY GRANTED. THIS APPEAL WAS HEARD ON MERITS EXPARTE APPELLENT AFTER HEARING THE LEARNED D.R. 2. ASSESSEE HAS RAISED 8 GROUNDS. GROUND NOS. 1 TO 4 P ERTAIN TO THE CLAIM OF LOSS ON SALE OF PREFERENCE SHARES REJECTED BY THE A.O. AND GROUND NOS. 5 & 6 PERTAIN TO DISALLOWANCE OF EXPENDITURE U NDER SECTION 14A. GROUND NOS. 7 & 8 ARE CONSEQUENTIAL WITH REFERENCE TO INTEREST AND PENALTY WHICH NEED NOT BE ADJUDICATED. 3. BRIEFLY STATED THE ASSESSEE COMPANY FILED RETURN O F INCOME FOR A.Y. 2000-01 DECLARING AN INCOME OF ` 6 56 57 090/- INTER ALIA CLAIMING BUSINESS ITA NOS. 1901&2591/MUM/2004 M/S. SAKARWADI TRADING CO. P. LTD. 2 LOSS OF ` 2 57 854/- AND CAPITAL GAIN OF ` 65 91 477/-. THE A.O. IN THE COURSE OF ASSESSMENT NOTICED THAT ASSESSEE COMPANY HAS SOL D ITS SHARE HOLDINGS IN M/S. BAJAJ AUTO LTD. AND HAD LONG TERM CAPITAL GAIN S OF ` 13 06 64 939/-. AS AGAINST THIS CAPITAL GAINS ASSESSEE HAS CLAIMED CAP ITAL LOSS OF ` 6 47 50 000/- BY WAY OF SALE OF PREFERENCE SHARES I N GROUP COMPANIES. A.O. FURTHER NOTICED THAT THE ASSESSEE PURCHASED TOTAL O F 750 10% PREFERENCE SHARES OF ` 1 00 000/- EACH WITH A TOTAL INVESTMENT OF ` 7.5 CRORES BETWEEN JANUARY 1999 TO MARCH 1999 IN THE GROUP COMPANY OF M/S. SOMAIYA ORGANICS (INDIA) LTD. WHICH WAS HAVING LOSSES AND W AS NOT PAYING ANY DIVIDEND. HE FURTHER NOTICED THAT THE ASSESSEE ON 1 6.03.2000 SOLD THE SHARES TO ANOTHER GROUP COMPANY AT A PRICE OF ` 7 500/- PER SHARE ON THE BASIS OF THE VALUATION REPORT THEREBY INCURRING SU BSTANTIAL LOSS OF ` 6.47 CRORES. A.O. ALSO NOTICED THAT THE DIRECTORS OF THE COMPANY PARTICULARLY MR. S.K. SOMAIYA IS COMMON FOR BOTH THE COMPANIES AND T HE ENTIRE EXERCISE WAS UNDERTAKEN WITH A VIEW TO REDUCE LONG TERM CAPITAL GAINS BY MAKING A COLOURABLE DEVICE TO EVADE TAX. ACCORDINGLY HE DIS ALLOWED THE LOSS STATING THAT THE ASSESSEE HAS NOT SUBSTANTIATED WHY THE INV ESTMENT HAD BEEN MADE IN A PRIVATE PLACEMENT OF PREFERENCE SHARES WITH G ROUP COMPANIES AND THE NEED FOR SELLING THE SAME AT A SUBSTANTIAL LOSS (AT ` 7500/- AS AGAINST THE PURCHASE PRICE OF ` 1 00 000/-). IN VIEW OF THIS THE LOSS CLAIM WAS DIS ALLOWED BY THE A.O. THE ISSUE WAS CONTESTED BEFORE THE CIT( A) AND THE CIT(A) HAS NOTED THE FOLLOWING FACTS IN PARA 4.6 OF THIS ORDER : 4.6 ON A CAREFUL CONSIDERATION OF THE ABOVE FACTS THE FOLLOWING FACTS HAVE EMERGED. I) DURING THE YEAR UNDER CONSIDERATION THE ASSESS EE HAD SOLD 362043 SHARES OF BAJAJ AUTO LTD. AND THUS MADE LONG TERM CAPITAL GAIN OF RS.13 06 64 939/-. II) IN THE RELEVANT YEAR (A.Y. 99-2000) THE ASSESS EE HAD SUBSCRIBED FOR 700 REDEEMABLE CUMULATIVE PREFERENCE SHARES OF RS.1 LAKH EACH OF SOMAIYA ORGANIC LTD. III) THE ASSESSEE HAD VALUED THESE 700 PREFERENCE SHARES AT RS.7500/- PER SHARE AND SOLD THE SAME ON 23/03/2000 TO M/S. MORGANITE TRADING CO. LTD. FOR A TOTAL CONSIDERATIO N OF RS.52 50 000/- AND THUS INCURRED A LOSS OF RS.5 47 50 000/-. ITA NOS. 1901&2591/MUM/2004 M/S. SAKARWADI TRADING CO. P. LTD. 3 IV) THE ASSESSEE HAD ALSO PLEDGED 216349 BAJAJ AUT O LTD. SHARES AND STOOD AS A GUARANTEE FOR A LOAN OF RS.47 4.93 LAKHS TAKEN BY SOMAIYA ORGANICS INDIA LTD. V) THE DIRECTOR OF THE APPELLANT COMPANY SHRI S.K. SOMAIYA HAS SUBSTANTIAL INTEREST IN SOMAIYA ORGANICS INDIA LTD. VI) THE WHOLE TRANSACTION HAS NOT BEEN MADE THROUG H STOCK EXCHANGE BUT WERE PRIVATELY PLACED AND THESE SHARES ARE NOT LISTED. VII) THE ASSESSEE HAS NOT BEEN ABLE TO EXPLAIN AS TO UNDER WHAT CIRCUMSTANCES THE SHARES OF RS.1 LAKH PER PREF ERENCE SHARE OF SOMAIYA ORGANICS INDIA LTD. WERE SUBSCRIBED BY THE APPELLANT COMPANY AND IT WAS SOLD AT RS.7500 PER SHARE TO MOR GANITE TRADING CO. LTD. WHY THE DIRECTOR SHRI S.K. SOMAIYA WHO HA D SUBSTANTIAL INTEREST IN SOMAIYA ORGANICS INDIA LTD. DID NOT GET THE VALUATION DONE AT THE TIME OF SUBSCRIBING THESE PREFERENCE SHARES FROM SOMAIYA ORGANICS INDIA LTD. AND THEN FOUND IT NECESSARY TO GET THE VALUATION REPORT DONE AT THE TIME OF SELLING IT TO M/S. MORGA NITE TRADING CO. LTD. 4. THEREAFTER HE REJECTED ASSESSEES CONTENTION AND CO NFIRMED THE ACTION OF THE A.O. VIDE PARA 4.7 AS UNDER: - 4.7 I HAVE CAREFULLY CONSIDERED THE ABOVE FACTS OF THE CASE RIVAL SUBMISSION AS WELL AS THE FINDINGS OF THE A.O. THE APPELLANT HAS SUBMITTED THAT AT THE TIME OF SALE THE RATE OF SHA RES HAD FALLEN DOWN BUT BROUGHT NOTHING ON RECORD TO SHOW AS TO WHAT UN FORESEEN EVENT HAPPENED BETWEEN THE DATE OF PURCHASE AND DATE OF S ALE BY WHICH THE PRICE OF PREFERENCE SHARE FELL DOWN. THE APPELL ANT HAD EVEN BROUGHT NOTHING ON RECORD TO SHOW WHAT WERE THE CON DITIONS ATTACHED AT THE TIME OF PURCHASE. ALL THESE CIRCUMSTANCES CL EARLY PROVE THAT THE WHOLE TRANSACTION IS A MAKE BELIEVE TRANSACTION AND WITH THE MOTIVE TO REDUCE THE INCIDENCE OF TAX ON THE HUGE PROFIT E ARNED BY THE ASSESSEE BY SELLING THE SHARES OF BAJAJ AUTO LTD. I N THE ABSENCE OF THE EVIDENCE TO SHOW AS TO UNDER WHAT CIRCUMSTANCES THE PRICE OF THE SHARES FELL DOWN I HOLD THAT THE PURCHASE WAS MADE AT AN INFLATED PRICE AND NOT AT THE FAIR MARKET VALUE. IF THE TRAN SACTION IS LOOKED INTO IN THE TOTALITY OF THE CIRCUMSTANCES IT IS EVIDENT THAT IT IS NOTHING BUT A PAPER TRANSACTION MADE WITH A VIEW TO AVOID PAYMENT OF TAXES ON THE PROFITS MADE ON SALE OF THE SHARES OF BAJAJ AUTO LT D. AFTER CONSIDERING ALL THE FACTS I AM OF THE VIEW THAT ALL FISCAL IMP LICATIONS OF THE TRANSACTIONS ARE REQUIRED TO BE LOOKED INTO AS HELD BY BOMBAY HIGH COURT IN THE CASE OF TWINSTAR HOLDINGS LTD. 260 ITR 6. THE HON'BLE SUPREME COURT IN THE CASE OF MC DOWELL AND CO. LTD. VS. CTO 154 ITR 148 HAS HELD THAT EVEN IF THE TRANSACTION IS GENUIN E AND EVEN IF IT IS ACTUALLY ACTED UPON IF THE TRANSACTION IS ENTERED INTO WITH AN INTENTION OF TAX AVOIDANCE THEN THE TRANSACTION WO ULD CONSTITUTE A COLOURABLE DEVICE. IN THE INSTANT CASE ALSO THE AS SESSEE HAS ENTERED INTO A TRANSACTION AS EXPLAINED ABOVE JUST WITH THE INTENTION TO INCUR ITA NOS. 1901&2591/MUM/2004 M/S. SAKARWADI TRADING CO. P. LTD. 4 LOSS AND TO SET IT OFF AGAINST THE LONG TERM CAPITA L GAIN. THE TRANSACTION ENTERED INTO BY THE ASSESSEE HAS ONLY O NE MOTIVE I.E. TO AVOID TAX. HENCE I HOLD THAT THE LOSS INCURRED BY THE ASSESSEE IS NOT TO BE ALLOWED AS TRADING LOSS OR CAPITAL LOSS AND T HIS IS NOT TO BE ALLOWED TO BE SET IT OFF OR CARRY FORWARD BUT SAME IS TO BE IGNORED. THUS THE ENTIRE CAPITAL LOSS OF RS.6 47 50 000/- D ISALLOWED BY THE A.O. IS HEREBY CONFIRMED. APPELLANTS APPEAL ON THI S GROUND IS DISMISSED. 5. ASSESSEE PLACED A PAPER BOOK EARLIER CONTAINING 106 PAGES WHICH MAINLY CONTAINS ACCOUNTS OF M/S. SOMAIYA ORGANIC I NDIA LTD. COMPUTATION OF INCOME TAX AND ANNUAL ACCOUNTS FOR A.Y. 1999-200 0 OF THE ASSESSEE COMPANY AND DETAILS OF LOANS AND INTEREST RECEIVED AND DIVIDEND RECEIVED. 6. THE LEARNED D.R. HOWEVER VIDE LETTER DATED 24.05. 2007 PLACED WRITTEN SUBMISSION ON RECORD INCLUDING RETURNS FILED BY THE GROUP COMPANIES AND OTHER DOCUMENTS. THE SUBMISSIONS WITH REFERENCE TO THE ISSUE OF SHORT TERM CAPITAL LOSS IS AS UNDER: - 6. ARGUING ON BEHALF OF THE DEPARTMENT I HEREBY R ELY ON THE FACTS AND FINDINGS OF ASSESSING OFFICER AND OF THE LEARNED CIT(A). TO SUPPORT AND STRENGTH THE HOLDINGS OF ASSESSING OFFICER AND THE CIT(A) IT IS ARGUED AND SUBMITTED BEFORE THE HON'BLE BENCH THAT THE SOLE INTENTION OF THE ASSESS EE BY SELLING THE 10% REDEEMABLE PREFERENCE SHARES OF M/S. SOMAIYA ORGANICS LTD. AT A THROUGH AWAY PRICE WAS TO EARN A CAPITAL LOSS JUST TO SAVE TAX ON LONG TERM C APITAL GAINS. THE ENTIRE TRANSACTION OF PURCHASING AND THEREAFTER SELLING THESE PREFEREN CE SHARES WAS A SHAM TRANSACTION TO DEFRAUD THE REVENUE. THIS IS PROVED FROM THE FOLLOWING FACTS: - 6(I) THE SOMAIYA GROUP CONSISTS OF AND CONTROLS MAN Y COMPANIES. THE ASSESSEE COMPANY IS ALSO PART OF SOMAIYA GROUP AS ITS DIRECT OR SHRI S.K. SOMAIYA WAS ALSO CHAIRMAN OF M/S. SOMAIYA ORGANICS LTD. WHICH WAS A FLAGSHIP COMPANY OF THE GROUP. HOWEVER THE FLAGSHIP COMPANY M/S. SOMAIYA O RGANICS (INDIA) LTD. WAS NOT PERFORMING WELL ADDITION WAS HAVING HUGE LOSS OVER THE YEARS. IT DID NOT DISTRIBUTE DIVIDEND FOR NUMBER OF YEARS. THESE FACTS ARE EVIDE NT FROM THE P & L A/C AND BALANCE SHEET OF M/S. SOMAIYA ORGANICS INDIA LTD. F OR A.Y. 99-2000 TO A.Y. 2002-03 PLACED AT PAGES 87 TO 1000 OF THE PAPER BOOK. THE A SSESSEE ALSO CONFIRMED THIS FACT VIDE ITS LETTER DATED 27-07-2006 FILED DURING THE ASSESSMENT PROCEEDINGS FOR A.Y. 2004-05 STATING THAT THE SOMAIYA ORGANICS IND IA LTD. WAS PART OF SOMAIYA GROUP OF COMPANIES AND WAS INCURRING LOSSES AND TH EREFORE THE GROUP HAD DECIDED TO DISINVESTMENT/DISPOSE OFF THE SAID COMPA NY. ASSESSEES THIS LETTER IS PLACED AT PAGE NO. 63-64 OF PAPER BOOK. THE BAD/RUI NING FINANCIAL POISON OF M/S. SOMAIYA ORGANICS INDIA LTD. WAS ALSO EVIDENT FROM T HE FACT THAT THE SOMAIYA GROUP SOLD ITS HOLDING OF 8 53 700 EQUITY SHARES IN THIS CAPACITY (WHICH WAS 68.85% OF THE TOTAL ISSUED AND SUBSCRIBED CAPITAL OF SOMAIYA ORGA NICS) @ RS.4 EACH SHARE HAVING FACE VALUE OF RS.10 EACH. THE EQUITY SHARE PURCHASE AGREEMENT IS PLACED AT PAGE 54 TO 62 OF THIS PAPER BOOK. THE ABOVE FACTS EXPOSING THE BAD FINANCIAL POSITIO N OF M/S. SOMAIYA ORGANICS LTD. ARE VERY IMPORTANT FACTS AS IT HAD A DIRECT RE LEVANCE ON FIRSTLY THE PURCHASE OF 700 10% REDEEMABLE PREFERENCE SHARES HAVING FACE VALUE OF RS.1 00 000/- EACH OF M/S. SOMAIYA ORGANICS LTD. BY THE ASSESSEE COMPA NY @ RS.1 00 000 EACH SECONDLY THE SALE OF THESE PREFERENCE SHARES AT A THROUGH A WAY PRICE OF RS.7500/- EACH AND THIRDLY AGAIN RE-PURCHASE OF PART I.E. 270 PREFERENCE SHAR ES @ ITA NOS. 1901&2591/MUM/2004 M/S. SAKARWADI TRADING CO. P. LTD. 5 RS.1 00 000/- EACH (IN A.Y. 2002 PAGE 108) AND LASTLY SALE OF THESE 270 PREFERENCE SHARES @ RS.7 000/- EACH IN A.Y. 2004-05 (PAGE 53). 6(II) THE RETURN OF INCOME COMPUTATION OF INCOME A ND P & L A/C. ETC. OF ASSESSEE COMPANY FOR A.Y. 99-2000 ARE PLACED AT PAGE NO. 1 T O 9 OF PAPER BOOK. THE STATEMENT AT PAGE 3 SHOWS THAT DURING A.Y. 99-2000 THE ASSESSEE COMPANY REALISED SALE PRICE OF RS.1.71 + 2.99 = 4.70 CRORE ON SALE OF SHARES THOUGH THE CAPITAL GAIN WORKED TO RS.48.13 LACS ONLY AFTER IND EXATION AND DEDUCTION U/S. 54EA OF THE ACT. THE TAX ON CAPITAL GAIN WAS DULY PAID B Y THE COMPANY. 6(III) AS EVIDENT FROM THE BALANCE SHEET OF A.Y. 99 -2000 AT PAGES 5-7 THE ASSESSEE COMPANY WAS HAVING STOCK OF INVESTMENT IN SHARES OF VARIOUS COMPANIES SPECIALLY OF M/S. BAJAJ AUTO LTD. AND BAJAJ TEMP. THE COMPANY WAS EXPECTING HUGE CAPITAL GAIN IN SUBSEQUENT YEARS ON SALE OF THESE SHARES. 6(IV) WORKING ON PLANNED STRATEGY OF AVOIDING TAX O N CAPITAL GAIN IN SUBSEQUENT YEARS DURNG A.Y. 99-2000 THE ASSESSEE COMPANY PURC HASED 700 10% REDEEMABLE PREFERENCE SHARES OF FACE VALUE OF RS.1 00 000/- EACH OF M/S. SOMAIYA ORGANICS INDIA LTD. AT A TOTAL CONSIDERATION OF RS. 7 CRORE. THESE PREFERENCE SHARES WERE ON PRIVATE PLACEMENT BASIS AND WERE NOT LISTED IN THE STOCK EXCHANGE. IN FACT THE ENTIRE SOMAIYA GROUP ADOPTED THIS STRA TEGY. THE MAJORITY OF SOMAIYA GROUP COMPANIES ARE/WERE INVESTMENT COMPANI ES HOLDING INVESTMENT IN SHARES OF REPUTED COMPANIES VIZ. (M/S. BAJAJ AUTO L TD.) ETC. AS WELL AS OF GROUP COMPANIES ITSELF. THESE GROUP COMPANIES WERE BOUND TO EARN CAPITAL GAIN ON SALE OF THESE SHARES IN FUTURE. THEREFORE TO AVOID TAX ON CAPITAL GAIN M/S. SOMAIYA ORGANICS INDIA LTD. ISSUED 10% REDEEMABLE PREFERENC E SHARES OF FACE VALUE OF RS.1 00 000/- EACH TO THE OTHER GROUP COMPANIES. WH ENEVER CAPITAL GAIN WAS EARNED BY ANY OF THE GROUP COMPANY THESE PREFERENC E SHARES WERE SOLD BY THESE GROUP COMPANIES AT A THROUGH AWAY PRICE THUS EARNI NG A HUGE LOSS WHICH WAS SET OFF AGAINST CAPITAL GAIN EARNED ON SALE OF OTHER SH ARES. M/S. SOMAIYA ORGANICS (INDIA) LTD. ISSUED IN TOTAL 2270 - 10% REDEEMABLE PREFERENCE SHARES OF FACE VALUE OF RS.1 00 000/- EACH TO THE FOLLOWING GROUP COMPAN IES: M/S. SAKARWADI TRADING CO. : 700 PREF. SHARES X 1 0 0 000 EACH = 7 00 00 000/- M/S. GRAPEWINE GROWTH . : 18 PREF. SHARES X 1 00 0000 EACH = 18 00 000/ - ------------------------- 22 70 00 000/- (THE DETAILS OF OTHER COMPANIES COULD NOT BE GATHER ED AS THE ASSESSMENT RECORD OF M/S. SOMAIYA ORGANICS IS NOT AVAILABLE WITH THE ASS ESSING OFFICER IN LUCKNOW CIT CHARGE AND ALSO THAT FEW YEARS BACK IT MERGED WITH SOME OTHER GROUP COMPANY.) AS DISCUSSED ABOVE IN PARA 6(I) THE FINANCIAL NET WORTH OF M/S. SOMAIYA ORGANICS INDIA LTD. WAS NOT GOOD AND THEREFORE THE RE WAS NO JUSTIFICATION FOR THE ASSESSEE COMPANY FOR SUBSCRIBING TO THE PREFERENCE SHARES AT AN ASTRONOMICAL HIGH RATE OF RS.1 00 000/- EACH. IN FACT THIS WAS A WELL THOUGHT ARRANGEMENT HAVING TWIN OBJECT OF PROVIDING HUGE INTEREST FREE LOANS B Y GROUP COMPANIES TO M/S. SOMAIYA ORGANICS IN THE GUISE OF PREFERENCE SHARES AND SECONDLY SELLING THE SAME IN SUBSEQUENT YEARS TO EARN CAPITAL LOSS FOR ADJUST ING THE SAME AGAINST CAPITAL GAIN ON SALE OF OTHER SHARES. 6(V) THE DETAILS FOR A.Y. 2000-01 ARE PLACED AT PAG E 10-14 OF PAPER BOOK. DURING THE YEAR THE ASSESSEE COMPANY SOLD 3 62 043/- SHAR ES OF BAJAJ AUTO LTD. FOR A TOTAL CONSIDERATION OF RS.13.06 CRORES. REFER PAGE NO. 13 AS THE COST WAS NIL THE ITA NOS. 1901&2591/MUM/2004 M/S. SAKARWADI TRADING CO. P. LTD. 6 COMPANY EARNED LONG TERM CAPITAL GAIN OF RS.13.06 C RORE ON WHICH TAX @ 11% WAS PAYABLE AT RS.1.43 CRORE. THEREFORE TO AVOID T AX ON LONG TERM CAPITAL GAIN THE ASSESSEE COMPANY SOLD 700 10% REDEEMABLE PREF ERENCE SHARES OF FACE VALUE OF RS.1 00 000/- EACH TO ONE M/S. MORGONITE TRADING CO. LTD. @ RS.7 500/- EACH. THUS THE PREFERENCE SHARES OF FACE VALUE OF RS.1 00 000/- EACH WERE SOLD BY ASSESSEE COMPANY AT A THROUGH AWAY PRICE OF RS.7 50 0/- EACH. THE TOTAL SALE CONSIDERATION RECEIVED WAS RS.52 50 000/- AGAINST P URCHASE CONSIDERATION PAID AT RS.7 00 00 000/-. THEREBY THE COMPANY EARNED A SHOR T TERM CAPITAL LOSS OF RS.6.47 CRORE WHICH WAS ADJUSTED AGAINST LONG TERM CAPITAL GAIN OF RS.13.06 CRORE. IN THIS WAY THE CAPITAL GAIN WAS ARTIFICIALLY REDUCED TO THE EXTENT OF RS.6.47 CRORE AND SO TAX THEREON. IT WAS WORTH TO MENTION HERE THAT THE ASSESSEE COM PANY EARNED CASH OF RS.13 CRORE DURING THE YEAR ON SALE OF BAJAJ SHARES AND THEREFORE THERE WAS NO JUSTIFICATION COMMERCIAL REASON AND NECESSITY OR I MMEDIATE NEED FOR PANIC SALE OF PREFERENCE SHARES WORTH RS.7 CRORE FOR JUST RS.5 2 50 LACS. TO JUSTIFY ITS STAND FOR THIS SALE AT THROUGH AWAY PRICE THE COMPANY HAS FI LED SHARE VALUATION REPORT OF SOMAIYA ORGANICS LTD. PLACED AT PAGE 22 OF THIS PA RE BOOK. HOWEVER THIS VALUATION REPORT WAS SELF CREATED MANIPULATED AND SELF SERVING DOCUMENT ONLY. 6(VI) THE DOCUMENTS PERTAINING TO M/S. MORGANITE TR ADING CO. LTD. FOR A.Y. 2000- 01 AND 2002-03 ARE PLACED AT PAGE 38-52 OF PAPER BO OK. IN A.Y. 2000-01 THIS COMPANY PURCHASED 1260 NUMBER OF 10% REDEEMABLE PRE FERENCE SHARES FACE VALUE OF RS.1 00 000/- EACH OF M/S. SOMAIYA ORGANICS INDI A LTD. @ RS.7 500/- PER SHARE (PAGE 47). THE 700 SHARES WERE PURCHASED FROM ASSES SEE COMPANY WHEREAS 560 SHARES WERE PURCHASED FROM M/S. LAXMIWADA SUGAR FAC TORY LTD. THE OTHER SOMAIYA GROUP COMPANY. IN A.Y. 02-03 THIS COMPANY SOLD 1260 NUMBER OF PREFERENCE SHARE @ RS.8750/- EACH TO THE FOLLOWING COMPANIES: TOPAZ WAREHOUSING CO. 300 SHARES RS.26 25 000/- KARNATAKA ORGANIC CHEMICAL LTD. 160 SHARES RS.14 00 000/- FILM MEDIA COMMUNICATIONS 410 SHARES RS.35 87 500 /- YELLOW VALLEY TRANSPORT P. LTD. 240 SHARES RS.21 0 0 000/- GRAPEWINE GROWTH CONST. 150 SHARES RS.13 12 500/- ----------------------- RS.1 10 25 000/- (REFER PAGE 50 TO 52) 6(VII) IN A.Y. 2002-03 THE ASSESSEE COMPANY AGAIN RE-PURCHASED 270 NUMBER OF 10% REDEEMABLE PREFERENCE SHARES OF FACE VALUE OF R S.1 00 000/- EACH OF SOMAIYA ORGANICS INDIA LTD. @ RS.1 00 000/- EACH AT TOTAL C OST OF RS.2.70 CRORE. THESE WERE PURCHASED BY ASSESSEE COMPANY FROM M/S. (DETAILS NO T AVAILABLE). THE COMPUTATION OF INCOME P & L A/C. BALANCE SHEET ETC.. FOR A.Y. 02-03 ARE PLACED AT PAGE 108 OF PAPER BOOK. IN THIS REFERENCE ASSESSEES LETTER DAT ED 15-2-06 PLACED AT PAGE 65 OF PAPER BOOK MAY ALSO BE REFERRED STATING THAT THE COMPANY HAD MADE PURCHASE OF 270 10% PREFERE NCE SHARES (REDEEMABLE AND CUMULATIVE) OF SOMAIYA ORGANICS (I) LTD. @ RS.1 00 000/- PER SHARE. THE SAID SHARES ARE HAVING FACE VALUE OF RS. 1 LAKH EACH I.E. THE AGGREGATE INVESTMENT OF RS.2 70 00 000/-. THE COMPA NY HAS MADE PURCHASE OF THE SHARE FROM ITS OWN FUNDS. NO. DATE RS. 220 26-3-02 2 20 00 000/- 50 31.-3.02 50 00 000/- ITA NOS. 1901&2591/MUM/2004 M/S. SAKARWADI TRADING CO. P. LTD. 7 IT IS VERY STRANGE TO NOTE THAT THE FINANCIAL NET WORTH OF M.S SOMAIYA ORGANICS WAS BECOMING BAD TO WORSE AS ADMITTED BY ASSESSEE. THE COMPANY ADMITTED THIS FACT IN ITS LETTER DATED 27-7-06 (PAGE 63) AND VALU ATION REPORT (PAGE 22) JUSTIFYING SALE OF THESE PREFERENCE SHARES AT THROUGH AWAY PRI CE OF RS.7 500/- EACH. EVEN THEREAFTER THE ASSESSEE COMPANY STRANGELY THOUGHT IT AN INTELLIGENT BUSINESS DECISION TO PURCHASE THESE PREFERENCE SHARES @ RS.1 00.000/- EACH WHEREAS THE MARKET PRICE WOULD HAVE BEEN MUCH LOWER THAN RS.7 5 00/- OF EACH PREFERENCE SHARE KEEPING IN VIEW THE FINANCIAL NET WORTH OF M/ S. SOMAIYA ORGANICS. IN FACT THE RE-PURCHASE OF THESE 270 PREFERENCE SH ARES BY ASSESSEE COMPANY WAS PART OF LARGE STRATEGY OF SOMAIYA GROUP AS A WHOLE. THE OTHER GROUP COMPANIES ALSO MUST HAVE INDULGED IN THIS PRACTICE OF TAX AVO IDANCE. HOWEVER THE DETAILS OF THOSE OTHER GROUP COMPANIES ARE NOT AVAILABLE. M/S. SOMAIYA ORGANICS LTD. WAS HAVING REGISTERED OFFICE AT SOMAIYA NAGAR DISTT. B ARABANKI U.P. AND WAS BEING ASSESSED WITH CIT-II LUCKNOW. HOWEVER M/S. SOMAIY A ORGANICS MERGED WITH M/S. J.R. AGRO INDS. LTD. W.E.F. 21-07-03 AND THERE FORE ITS ASSESSMENT ORDER RECORD UPTO A.Y. 2003-04 ARE NOT AVAILABLE IN CIT-II LUCK NOW CHARGE. TO SUM UP IT IS SUBMITTED THAT IT IS A FIT CASE F OR LIFTING OF CORPORATE VEIL AND EXAMINATION OF REAL NATURE OF TRANSACTION. THE UNDE RSIGNED RELY ON THE FOLLOWING CASE LAW FOR THIS PURPOSE 261 ITR 358 (MAD) K. RAMA SWAMY VS. CIT 263 ITR 289 (CAL) HINDUSTAN TEA TRADING CO. 256 ITR 563 (DEL) SHIVKANT JHA V/S. U.O.I. 241 ITR 193 (MAD) 21 ST SOCIETY O IMMACULATE 238 ITR 70 (MAD) INDIAN EXPRESS IMMACULATE 235 ITR 565 (AAR) XYZ IN RE. CORPORATE VEIL OF THE COMPANY CAN BE LIFTED FOR TH E PURPOSE OF ASCERTAINING THE REAL CHARACTER OF A TRANSACTION IF IT WAS INTEND TO AVOID THE TAX. 7. THE ABOVE CONTENTIONS OF THE REVENUE ARE UNCONTROVE RTED. THE FACT THAT ASSESSEE WAS SEEKING REGULAR ADJOURNMENTS EVEN AFTER PLACING THE PAPER BOOK ON RECORD AND WRITTEN SUBMISSIONS BY THE DR DO INDICATE THAT THEY HAVE NOT MUCH TO SAY ON THE ISSUE. 8. WE HAVE CONSIDERED THE ISSUE AND PERUSED THE PAPER BOOK ON RECORD. AFTER CONSIDERING THE ISSUE IN ITS CORRECT PERSPECT IVE WE ARE OF THE OPINION THAT THE ASSESSEE HAS BOOKED ARTIFICIAL LOSS BY SEL LING AT RIDICULOUSLY LOW PRICE SUPPOSED TO BE BASED ON A VALUATION REPORT. S INCE THESE ARE PREFERENCE SHARES THAT TOO IN A PRIVATE PLACEMENT INVESTMENT AND SALE DECISIONS DOES NOT SUPPORT ANY BUSINESS EXPEDIENCY. AS CONSIDERED BY THE REVENUE AUTHORITIES THIS PRACTICE SEEMS TO HAVE BEEN INDU LGED TO AVOID TAX AND COUPLED WITH THE FACT THAT THE SHARES WERE AGAIN PU RCHASED FROM M/S. MORGANITE TRADING CO. LTD. IN A LATER YEAR AGAIN AT A HIGH PRICE AND AGAIN SOLD DO INDICATE THAT THESE TRANSACTIONS ARE UNDER TAKEN IN THE GROUP SO AS ITA NOS. 1901&2591/MUM/2004 M/S. SAKARWADI TRADING CO. P. LTD. 8 TO REDUCE THE INSTANCE OF TAX ON SALE OF BAGAJ AUTO LTD. IN VIEW OF THE SUBMISSION OF THE LEARNED D.R. WHICH ARE NOT CONTRA DICTED BY THE ASSESSEE EVENTHOUGH PLACED ON RECORD AS EARLY AS 27.04.2007 WE AGREE WITH THE FINDINGS OF THE A.O. AND THE CIT(A) THAT THE LOSS C LAIMED CANNOT BE ALLOWED AS A GENUINE LOSS. ACCORDINGLY THE ISSUE IN GROUND NOS. 1 TO 4 ARE REJECTED. 9. WITH REFERENCE TO THE ISSUE OF DISALLOWANCE OF A SU M OF ` 70 61 154/- BY APPLYING THE PROVISIONS OF SECTION 14A OF THE I. T. ACT IT IS NOTICED THAT THE ASSESSEE HAD A DIVIDEND INCOME OF ` 88 62 205/- WHICH WAS CLAIMED EXEMPT UNDER SECTION 10(33) OF THE I.T. ACT. AS AGAINST TH IS THE A.O. DISALLOWED AN AMOUNT OF ` 70 61 154/- BY TAKING THE TOTAL INVESTMENT IN SHARE S PROPORTIONATE TO THE REST OF THE ASSETS. THE DISALL OWANCE SEEMS TO BE EXCESSIVE. THE EXPENDITURE INCURRED FOR EARNING THE EXEMPT INCOME ONLY CAN BE CONSIDERED WHEREAS THE VARIOUS INVESTMENTS MADE BY THE ASSESSEE HAVE ALSO YIELDED CAPITAL GAINS WHICH WAS ALSO AN ISSUE IN GROUND NO. 1. THE INTEREST CLAIMED IF ANY ON INVESTMENT IN SHARES N OT CONSIDERED AS TRADING ASSETS SHOULD HAVE BEEN EXAMINED UNDER SECTION 36( 1)(III) BUT NOT UNDER SECTION 14A. SECTION 14A HAS LIMITED PURPOSE TO CON SIDER THE EXPENDITURE RELATABLE TO EXEMPT INCOME. SINCE THE HON'BLE BOMBA Y HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD. VS. DCIT 328 I TR 81 HAS CONSIDERED THE ISSUE OF DISALLOWANCE UNDER SECTION 14A WE ARE OF THE OPINION THAT THE ISSUE IS TO BE RE-EXAMINED BY THE A.O. KEEPING IN MIND TH E PRINCIPLES ESTABLISHED BY THE HON'BLE BOMBAY HIGH COURT OR ANY OTHER CASE LAW THAT MAY BE DELIVERED SUBSEQUENTLY BY ANY OTHER HIGHER JUDICIAL FORUM. A.O. IS DIRECTED TO REWORK OUT THE DISALLOWANCE UNDER SECTION 14A AN D FOR THIS PURPOSE THE ISSUE IN GROUND NOS. 5 & 6 ARE RESTORED TO THE FILE OF THE A.O. ASSESSEE SHOULD BE GIVEN AN OPPORTUNITY BEFORE MAKING ANY RE ASONABLE AMOUNT AS DISALLOWANCE UNDER SECTION 14A. 10. APPEAL IS CONSIDERED PARTLY ALLOWED FOR STATISTICAL PURPOSES. ITA NO. 2591/MUM/2006 11. THIS APPEAL IS AGAINST THE ORDER OF THE CIT(A)-XXXI II MUMBAI DATED 01..2006 CONFIRMING THE PENALTY UNDER SECTION 271(1 )(C) LEVIED BY THE A.O. ITA NOS. 1901&2591/MUM/2004 M/S. SAKARWADI TRADING CO. P. LTD. 9 12. IN THIS CASE THE PENALTY PROCEEDINGS HAVE BEEN INI TIATED FOR FURNISHING INACCURATE PARTICULARS OF INCOME FOR WRONGFUL SET O FF OF SHORT TERM CAPITAL LOSS WITH THE CAPITAL GAIN GENERATED OUT OF SALE OF BAJAJ AUTO SHARES AND WRONGFULLY NOT ALLOCATING AND EXPENSES FOR EARNING EXEMPT INCOME. THE A.O. HELD THAT THE ASSESSEE HAS DELIBERATELY ACTED IN DE FIANCE OF LAW AND HAS BEEN GUILTY OF CONDUCT CONTUMACIOUS OR DISHONEST OR ACTE D IN CONSCIOUS DISREGARD OF ITS OBLIGATIONS. THE A.O. LEVIED PENALTY ON THE DISALLOWANCE MADE ON THE FOLLOWING OCCASIONS: - I) DISALLOWANCE OF SHORT TERM CAPITAL LOSS OF ` 6 47 50 000/- AGAINST THE LONG TERM CAPITAL GAIN. II) DISALLOWANCE UNDER SECTION 14A OF ` 45 89 750/- BEING EXPENSES INCURRED IN EARNING THE DIVIDEND. THE CIT(A) AFTER EXAMINING ASSESSEES SUBMISSION C ONFIRMED THE PENALTY ON THE LOSS WHEREAS HE DELETED THE PENALTY ON DISALLOW ANCE UNDER SECTION 14A. THE REASONS FOR CONFIRMING THE PENALTY IS STATED IN PARA 3 3.1 AND 3.4 OF HIS ORDER. 13. AS STATED ABOVE THE ASSESSEE WAS NOT REPRESENTED AN D SOUGHT ADJOURNMENT AT NUMBER OF TIMES. SINCE SUFFICIENT OP PORTUNITY WAS GIVEN TO THE ASSESSEE THE ADJOURNMENT SOUGHT ON 7 TH MARCH 2011 IN THE POSTING ON 08.03.2011 WAS REJECTED AND THE APPEAL WAS HEARD EX PARTE. BY OUR DISCUSSION IN THE QUANTUM APPEAL WE HAVE CONFIRMED THE DISALLOWANCE OF CLAIM OF CAPITAL LOSS. CONSEQUENT THAT WE ALSO UPH OLD THE ORDER OF THE CIT(A) AS THE ASSESSEE MADE A DELIBERATE ATTEMPT TO CLAIM LOSS FOR SET OFF CAPITAL GAINS EARNED. THE PRINCIPLES ESTABLISHED BY THE HON 'BLE SUPREME COURT IN THE CASE OF RELIANCE PETRO PRODUCTS 322 ITR 158 DOE S NOT APPLY TO THE FACTS OF THE PRESENT CASE AS ASSESSEE HAS NOT MADE ANY GE NUINE CLAIM BUT ATTEMPTED TO REDUCE THE GAIN BY SELLING PREFERENCE SHARES IN GROUP COMPANIES AT A RIDICULOUSLY LOW PRICE SO AS TO HAVE ARTIFICIAL CAPITAL GAIN LOSS. IN VIEW OF THIS WE AGREE WITH THE FINDINGS O F THE CIT(A) THAT THIS CASE CALLS FOR PENALTY UNDER SECTION 271(1)(C). ACCORDIN GLY THE ORDER OF THE CIT(A) IS UPHELD. ITA NOS. 1901&2591/MUM/2004 M/S. SAKARWADI TRADING CO. P. LTD. 10 14. IN THE RESULT APPEAL IN ITA NO. 1901/MUM/2004 IS P ARTLY ALLOWED FOR STATISTICAL PURPOSE AND ITA NO. 2591/MUM/2006 IS DI SMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 31 ST MARCH 2011. SD/- SD/- (D. MANMOHAN) (B. RAMAKOTAIAH) VICE PRESIDENT ACCOUNTANT MEMBER MUMBAI DATED: 31 ST MARCH 2011 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) XXXII MUMBAI 4. THE CIT II MUMBAI CITY 5. THE DR B BENCH ITAT MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT MUMBAI BENCHES MUMBAI N.P.